CMP: INR67 TP: INR68 (+1%) Neutral

Transcription

1 28 January QFY16 Results Update Sector: Metals Vedanta BSE SENSEX S&P CNX 24,470 7,425 Bloomberg VEDL IN Equity Shares (m) 2,964.7 M.Cap.(INRb)/(USDb) / Week Range (INR) 233 / 62 1, 6, 12 Rel. Per (%) -21/-35/-49 12M Avg Val (INR M) 1156 Free float (%) 40.5 Financials & Valuations (INR b) Y/E Mar E 2017E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change CMP: INR67 TP: INR68 (+1%) Neutral In-line result; net debt up; a few positives for aluminum Vedanta s (VEDL) 3QFY16 EBITDA declined 20% QoQ (49% YoY) to INR29.1b (adj. for INR2b one-time benefit in copper business), 6% miss. The beat at zinc India and aluminum was partly offset by weaker oil, zinc international and power. Adj. loss after tax of INR1.8b was on expected lines. Net attributable debt was up INR28b. Aluminum: Receives long pending approvals; cost too trending down VEDL has received the approval to convert 1,800MW IPP to CPP; this will help in ramping up Jharsuguda 1.25mtpa Phase-2 smelter. The company plans to commission the first 312kt pot line w.e.f. April 1, VEDL has also received approval to expand the Lanjigarh refinery by 4mtpa to 6mtpa. However, alumina production is unviable at current prices. The aluminum segment benefited from lower cost of alumina and coal. Production cost was down 7% QoQ to USD1,599/t for Balco and USD1,485/t for Jharsuguda. The cost will trend further down due to declining alumina prices and aggressive cost reduction exercise. High-quality assets, but equity value volatility high due to leverage VEDL is taking great efforts to reduce cost and preserve cash to tide over the cyclical downturn. Indian zinc and copper businesses are still strong, while merchant power, iron ore, oil and international zinc businesses are stressed. Although VEDL has high-quality operating assets, the capital structure is highly inefficient with huge cash flow and liability mismatch (Exhibit 5). The announced merger with Cairn India is critical to maintain liquidity. However, the divergence in stock performance has put the merger at risk. Further, the hope of minority buyout in HZL too has faded with recent Supreme Court advice to Govt. of India against further divestment. Despite a sharp correction in stock price, the risk to equity value still remains high owing to high leverage. Maintain Neutral with a target price of INR68. Sanjay Jain ([email protected]); Dhruv Muchhal ([email protected]); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 S.N. Business 2QFY16 update 3QFY16 update 1 Zinc India (1) Mine production grew 13% YoY (+3% QoQ) to 240kt. Zinc production grew 11% YoY while lead production was up 28% YoY. Silver production was up 45% YoY given higher silver content in new mines. (2) Integrated zinc/lead/silver sales increase was higher at 22%/53%/64% YoY on account of conversion of existing inventory and smelter efficiency. (3) CoP (ex-royalty) was down 9% YoY and 1% QoQ to USD771/t, leveraging from higher production volumes and decline in diesel and other consumable costs. Zinc Int (1) Refined zinc production was down 19% YoY (-9% QoQ) to 64kt due to maintenance shutdown at Skropion mine and decline at Lisheen as mine nears closure. (2) CoP was higher QoQ to USD1,477/t on lower volumes. (3) At Gamsberg pre-stripping work commenced in July 2015, as per the revised plan. Capex is cut by USD40m to USD40m for FY16E resulting in delay of 9 months. 2 Cairn India (1) Rajasthan production grew 3% YoY / -1% QoQ to 168.1kbpd. Production at Ravva and Cambay was higher by 19% YoY to 37kbpd. (2) Rajasthan realization discount to Brent was higher at 14.3% as against at 9.9% in 1QFY16. Management expects the discount to get back to historical average. (3) Opex/boe was reduced to USD5.5/boe from 5.8 in FY15 on operating efficiency. (4) DCF value of Cairn is INR192/share (long term Brent crude of USD65/bbl). Capex has been cut by USD200m to USD300m and MPT shutdown postponed. 3 Iron ore (1) Karnataka produced 0.6mt, in line with production plan. (2) All approvals in place for Goa mining operations. Production has commenced and will be rampedup in 3Q. First export shipment of purchase ore in E-auction flagged in Oct Copper (1) Copper production down 6% YoY to 94kt, due to maintenance shutdown. (2) Implied EBIT remained healthy at USc40/lb. Reported TcRcs was USc25.2/lb, as against USc22.9/lb in 1Q. (3) Management has guided for TcRcs to remain above USc24/lb for FY16. (1) Mine production was down 5% QoQ to 228kt on lower production from RAM mines. Zinc metal production was however down by just 2% QoQ on better smelter efficiency and inventory draw-down. Silver was 5% higher QoQ to 116kt. (2) CoP (ex-royalty) was up 4% QoQ to USD795/t, on lower production and increase in exploration activity. (3) It has put under review the expansion of Dariba and Zawar mines amid the low price environment. These mines together were to contribute ~186kt of incremental metal production by FY Deferral could put at risk its target of 1.2mt metal production by FY20-21 would become difficult. (1) Refined zinc production was down 19% QoQ (-36% YoY) to 51kt on Lisheen closure and delayed restart post the maintenance at Skorpion. (2) CoP was higher QoQ to USD1,579/t on lower volume, higher maintenance cost and lower grade. CoP for 4Q is guided at ~USD1,100-1,200/t on higher grade and volumes. (3) Pre-stripping at Skorpion for extension of the mine life has been deferred due to the current low price environment. (1) Rajasthan production declined 5.3% YoY / +1.4% QoQ to 170.4kbpd led by EOR polymer injection. Production at Ravva was down 18.6% YoY while at Cambay grew 1.8% YoY. (2) Rajasthan realization at USD34.5/bbl implied a discount to Brent of 21.1% v/s. 14.3% in 2QFY16. (3) Opex/bbl stood at USD7.9/bbl up from USD7.6/bbl on polymer injection cost. (4) DCF value of Cairn is INR153/share (based on Brent crude forward curves). The oil industry is lobbying for a reduction in cess from fixed to ad-volerum. (1) Karnataka produced 1.1mt, as production stabilized. Goa sales volume stood at 0.6mt against production of 0.3mt. Operations at Goa were impacted due to trucker s strike. (2) Lobbying the government for removal of double taxation (DMF + Goa Royalty), enhancing EC/mining cap of counter the lower global iron ore prices. (1) Copper production was down 5% QoQ to 89kt, on maintenance shutdown. Smelter is up and set to achieve 90% CU in 4Q. (2) Implied EBIT improved to USc33.2/lb from USc40/lb in 2Q. Reported TcRcs was at USc23.5/lb, as against USc25.2/lb in 2Q. (3) Tc/Rcs are expected to decline from current levels. 5 Aluminum (1) Aluminum production was flat QoQ at 233kt, as (1) Aluminum production was flat QoQ at 234kt. ramp-up at Balco is delayed while at Jharsuguda-II (2) CoP at both Balco and JH declined QoQ on lower alumina awaits CPP approvals. (2) CoP at Balco was down to USD1,725/t on lower alumina and coal cost. JH CoP was unchanged QoQ at USD1,599/t. and coal cost. Balco benefited from replacing old CPP with new 300MW CPP. Balco CoP was USD1,599/t and JH was USD1,485/t. CoP is guided to decline further. (3) FY16E aluminum volume guidance is 0.9mt. (3) Lanjigarh refinery operations are now reduced to (4) JH has got the approval to convert 1,800MW from IPP to single stream and will now operate at a capacity of ~800kt. Such measures drove CoP down to CPP of its 2,400MW plant. JH 312kt (of 1,250kt) will rampup from April 1 st. USD299/t from USD340/t earlier. 6 Power (1) Jharsuguda vols. at 1,554mkwh (PLF of 32%) was 6% lower YoY due to low demand/rates. (2) Talwandi Saboo 1 st unit operated at 86% availability The balance units will be commissioned in H2FY16. (1) JH vols at 1,593MU were flat QoQ. Realization was down to INR2.6/kWh from 2Q INR 2.95/kWh. (2) Tal. Saboo Unit II was commissioned in the quarter. Unit III would be commissioned by end of 4Q. 28 January

3 Exhibit 1: Production (TONNES) 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 FY16E Copper- India / Australia Copper - MIC 1, Copper - Cathodes 98,000 66, ,000 99,000 97,000 98,000 94,000 89, ,000 power sales (mkwh) Alumina (lanjigarh) 277, , , , , , , , ,000 Aluminium 200, , , , , , , , ,750 Jharsuguda 136, , , , , , , , ,000 Balco 64,000 60,000 71,000 85,000 84,000 80,000 84,000 84, ,750 Power sales (m kwh) 2,093 2,599 2,028 2,161 1,847 2,685 2,025 2,141 9,717 Jharsuguda 2,400 MW 1,701 2,154 1,653 1,873 1,525 2,266 1,554 1,593 7,069 Balco 270 MW MW ,684 MALCO HZL Wind Power Zinc India 0 Mined metal content 200, , , , , , , , ,082 Refined zinc 183, , , , , , , , ,602 Integrated only 179, , , , , , , , ,602 custom 3,500 2,000 7,000 4, Refined lead 36,009 31,000 30,000 30,000 36,000 31,000 40,000 35, ,352 Integrated only 29,009 27,000 26,000 25,000 33,000 27,000 39,000 35, ,352 custom 7,000 4,000 4,000 5,000 3,000 4,000 1, ,000 Saleable silver (kg) 84,000 90,777 89,100 97,500 97,900 98, , , ,100 Integrated only 78,000 64,777 76,100 82,500 90,900 86, , , ,800 custom 6,000 26,000 13,000 15,000 7,000 12,300 2, ,300 Zinc - international 83,000 84,000 79,000 80,000 70,000 70,000 63,000 51, ,000 Zinc refined skorpion 33,000 33,000 27,000 26,000 17,000 26,000 17,000 13,000 86,000 MMC (BMM & Lesheen) 50,000 51,000 52,000 54,000 53,000 44,000 46,000 38, ,000 Oil & Gas (m boe) - Gross O&G - Working Interest No. of days Avg. daily Gross Production 224, , , , , , , , ,091 Rajasthan 190, , , , , , , , ,406 Ravva 24,225 23,940 20,596 27,783 31,738 26,030 28,556 26,064 25,588 Cambay 9,323 10,765 10,651 11,107 9,609 9,736 8,958 11,172 10,097 Avg daily working Interest 142, , , , , , , , ,481 Rajasthan (70%) 133, , , , , , , , ,685 Ravva (25.5%) 5,451 5,387 4,634 6,251 7,141 5,857 6,425 5,864 5,757 Cambay (40%) 3,729 4,306 4,260 4,443 3,844 3,894 3,583 4,469 4,039 Iron ore (m dmt) sales Goa Karnataka Saleable production Goa Karnataka Pig iron 133, , , , , , , , ,000 Met coke 119, ,000 52, , , , , , , January

4 Exhibit 2: Quarterly performance INR m Y/E March 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 FY16E FY17E FY18E Net Sales 192, , , , , , , ,405 EBITDA 61,466 40,247 45,353 38,601 29, , , ,459 Standalone 14,504 9,323 10,553 8,753 7,327 34,889 34,408 41,322 Cu TcRc 5,469 3,698 5,828 6,152 4,370 21,200 18,100 18,900 SEL - power 1, ,496 1, ,115 3,444 3,444 VAL - aluminum 6,750 5,250 2,960 1,520 1,630 8,022 11,311 17,425 iron ore and others ,553 1,553 1,553 Cairn 20,269 7,878 12,904 9,107 6,661 32,668 21,652 33,303 HZL 20,892 19,891 19,655 20,245 14,783 67,057 53,116 57,968 Balco 1,260 1, ,190 3,305 Zinc-International 3,960 1,250 2, , TSPL ,546 10,513 10,570 Others ,679 3,679 Interest 13,293 13,208 13,578 14,181 13,906 56,936 63,785 66,834 Depreciation 23,279 7,635 17,175 16,602 17,704 68,703 70,859 75,822 Other Income 8,221-1,428 11,480 12,152 7,154 41,274 43,082 45,011 PBT (before XO item) 33,114 17,976 26,080 19,969 4,602 57,233 33,971 52,814 Extra-ordinary gain (loss) 0-202,682-4, ,000-2, PBT (after XO item) 33, ,706 21,937 19,969 6,602 55,090 33,971 52,814 Tax 4,776 5,494 3,525 2,040 1,606 10,219 12,382 16,893 Reported PAT 28, ,199 18,412 17,929 4,996 44,871 21,589 35,921 Less: Minority int. 12,463 5,177 8,459 9,587 4,819 26,133 16,271 20,230 Adjusted PAT 15,875 7,306 14,096 8,342-1,823 20,880 5,319 15,691 Source: MOSL, Company Exhibit 3: Net debt break-up by businesses (INR b) 31 December 2015 (actual) 31 Sep 2015 (actual) Debt Less: cash Net less: MI Attribut-able Debt Less: cash Net less:mi Attribut-able Standalone Cairn acquisition SPV Talwandi Sabo Zinc International Zinc India Cairn India Balco Others* Sesa Sterlite Source: Company, MOSL 28 January

5 Valuation TP: INR68, upside 2%; Neutral Implication from results We have cut out estimates for Jharsuguda power business on lower PLF and realization. We make other minor tweaks factoring in 3Q results. Our FY16E/17E EBITDA is cut by 4.9%/3.8% to INR105/97b. High class assets, but equity value volatility high due to leverage VEDL is putting tremendous amount of appreciable efforts to reduce cost and preserve cash to tide over the cyclical downturn. Indian zinc and copper business are still strong, while merchant power, iron ore, oil and international zinc business are stressed. Although VEDL has high class operating asset, the capital structure is highly inefficient with huge cash flow and liability mismatch (Exhibit 5). The announced merger with Cairn India is critical to maintaining liquidity. However, the divergence in stock performance has put the merger at risk. Further, the hope of minority buyout in HZL too has faded with recent Supreme Court advice to Govt. of India against further divestment. Despite sharp correction in stock prices, the risk to equity value still remain high due to high leverage. Maintain Neutral with target price of INR68. Key catalysts over the next 12 months Securing coal /bauxite mines as and when mines are auction. Ramp-up of iron ore production Government decision to divest HZL and Balco stake. Key risks Further pressure on crude oil and iron ore prices. INR appreciation to USD. Exhibit 4: Vedanta target price derivation Net Net Valuations EV CWIP Equity Sales EBITDA PAT Debt Net Basis Value Stake Attrib. INR/ (A) (G) Worth (B) C=(AxB) (D) {C-G+D} (%) Equity Share Stand-alone # x EBITDA Acquisition SPVs x EBITDA Hindustan Zinc x EBITDA Balco x EBITDA CMT+inter seg x EBITDA Zinc International x EBITDA TSPL DCF Cairn India =Cairn TP(INR/sh) Attributable SOTP Aluminium = USD /ton, Zinc = USD /ton, lead prices = USD1749/ton Silver = USD14.04/oz, USD/INR =67; FY17 estimates, Brent crude = USD 39.3/bbl Source: MOSL, Company 28 January

6 Exhibit 5: Vedanta has huge cash flow and liability mismatch Note: EBITDA has been annualized for understanding (2H EBITDA are likely to lower) Source: MOSL, Vedanta PLC s 1HFY16 presentation Exhibit 6: Metal sector valuation Rating Price MCAP EPS P/E (x) EV/EBITDA (x) P/B(x) (INR) (USD M) FY15 FY16E FY17E FY16E FY17E FY16E FY17E FY15 FY16E Steel Tata Steel Sell 254 3, JSW Steel Neutral 1,093 3, JSPL Neutral SAIL Sell 43 2, Non-Ferrous Hindalco Buy 70 2, Nalco Buy 34 1, Vedanta Neutral 67 2, Mining Coal India Buy , Hindustan Zinc Buy , NMDC Sell 79 4, Source: MOSL, Company 28 January

7 Story in charts Exhibit 7: Diversified commodity exposure (FY15 EBITDA) Copper Power 9.4% Iron ore 17.0% % Oil and Gas 20.9% Zinc and Lead 32.0% Aluminium 15.7% Exhibit 8: Moderating capex to drive FCF (INR b) Capex 107 Free Cash flow FY13 FY14 FY15E FY16E FY17E Source: Company, MOSL Source: Company, MOSL Exhibit 9: Global zinc deficit to decline Exhibit 10: Aluminum capacity to more than double Source: Company, MOSL Source: Company, MOSL Exhibit 11: Strong iron ore volume as Goa mines reopen Iron ore sales - mt Exhibit 12: Power segment volumes to increase Power sales (m kwh) , ,443 8,389 10,059 9,377 8,635 12,995 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Source: MOSL, Company FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Source: MOSL, Company 28 January

8 Financials and Valuation Vedanta Income Statement (INR Million) Y/E Mar E 2017E 2018E Net Sales 92,051 83,101 25, , , , , ,405 Change (%) , EBITDA 52,063 35,001 4, , , , , ,459 EBITDA Margin (%) Depreciation 964 1,061 1,975 84,250 71,243 68,703 70,859 75,822 EBIT 51,099 33,939 2, , ,138 72,895 54,674 74,637 Interest 901 4,333 4,394 61,110 56,264 56,936 63,785 66,834 Other Income 5,399 2, ,090 28,910 41,274 43,082 45,011 Extraordinary items , PBT 55,597 31,952-1, ,950-63,656 57,233 33,971 52,814 Tax 13,372 10, ,000 18,939 10,219 12,382 16,893 Tax Rate (%) Min. Int. & Assoc. Share ,430 43,024 28,238 16,271 20,230 Reported PAT 42,225 27, , ,618 18,775 5,319 15,691 Adjusted PAT 42,225 26,955-1,310 50,940 60,822 18,775 5,319 15,691 Change (%) , Balance Sheet (INR Million) Y/E Mar E 2017E 2018E Share Capital ,965 2,965 2,965 2,965 2,965 Reserves 127, , , , , , , ,403 Net Worth 128, , , , , , , ,368 Debt 9,995 37,413 45, , , , , ,271 Deferred Tax 682 1, ,352 33,297 32,460 34,434 34,619 Total Capital Employed 138, , ,022 1,901,073 1,704,870 1,757,015 1,758,296 1,782,104 Gross Fixed Assets 15,903 25,976 29, , ,415 1,007,143 1,119,141 1,155,510 Less: Acc Depreciation 6,492 7,651 9, , , , , ,339 Net Fixed Assets 9,411 18,325 19, , , , , ,171 Capital WIP 7,287 9,830 7, , , , , ,514 Investments 1 136, ,820 2,086 2,134 2,134 2,134 2,134 Current Assets 124,530 24,484 21, , , , , ,020 Inventory 7,374 8,752 9,610 90,338 87,250 88,231 88,181 96,982 Debtors 6,830 5,494 1,424 46,537 36,051 35,426 37,020 41,080 Cash & Bank 96,968 6,017 2, , , , , ,569 Loans & Adv, Others 13,358 4,222 8, , , , , ,390 Curr Liabs & Provns 17,193 14,370 8, , , , , ,633 Curr. Liabilities 11,695 11,502 5,471 41,346 52,782 20,894 20,526 27,523 Provisions 5,498 2,868 3, , , , , ,109 Net Current Assets 107,337 10,114 12, , , , , ,388 Total Assets 138, , ,022 1,901,073 1,704,870 1,757,015 1,758,296 1,782, January

9 Financials and valuation Vedanta Ratios Y/E Mar E 2017E 2018E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Asset Turnover (x) Debtors (No. of Days) Inventory (No. of Days) Creditors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2017E 2018E Adjusted EBITDA 52,063 35,001 4, , , , , ,459 Non cash opr. exp (inc) 1,270-3,458-1,426-46,653 15, (Inc)/Dec in Wkg. Cap. -1, ,818-10,239-25,345-42,781-2,754-3,995 Tax Paid -13,372-10, ,741-33,796-10,566-10,324-14,924 Other operating activities CF from Op. Activity 38,391 21, , ,051 88, , ,541 (Inc)/Dec in FA & CWIP -9,637-12, , ,561-40,162-39,407-28,561 Free cash flows 28,754 8, ,172 71,490 48,089 73, ,979 (Pur)/Sale of Invt 0-136,626 19,088-4,105 60, Others 3,343 14,112-26,443 14,967 4,371-26,000 8,819 9,842 CF from Inv. Activity -6, ,131-8,088-61,974-41,455-66,161-30,588-18,720 Inc/(Dec) in Net Worth 9, Inc / (Dec) in Debt -9,611 27,419 7,602 18,380-45,596 70,067 3,394 14,288 Interest Paid ,333-4,394-46,752-62,898-56,936-63,785-66,834 Divd Paid (incl Tax) & Others -3, ,144-31,063-15,610-12,141-12,141 CF from Fin. Activity -4,696 23,086 3,208-50, ,558-2,479-72,533-64,687 Inc/(Dec) in Cash 27,401-90,951-3,887 43,518-2,961 19,611 9,334 48,134 Add: Opening Balance 69,566 96,968 6, , , , , ,517 Closing Balance 96,968 6,017 2, , , , , , January

10 Corporate profile Company description Vedanta is formed with the merger of Sesa Goa and Sterlite Industries. Vedanta is one of the largest natural resource company globally with exposure to all the major commodities. It has refined zinc and lead capacities of 1.5mtpa in HZL and Zinc International, Crude oil production capacity of kboepd, Iron ore production capacity of 17mtpa, Aluminium capacity of 2.3mtpa and 8.8GW (including current expansion) of power capacity. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Sep-15 Jun-15 Sep-14 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding Citibank NA New York NYADR Department 4.2 Franklin Templeton Investment Funds 2.3 Life Insurance Corporation Of India 2.2 Bhadram Janhit Shalika 1.4 NA 0.0 Source: Capitaline Exhibit 4: Top management Name Navin Agarwal Anil Agarwal D D Jalan Tom Albanese Rajiv Choubey Designation Executive Chairman Chairman Emeritus Director & CFO Director & Chief Executive Off Company Secretary Exhibit 5: Directors Name Lalita Gupte Ravi Kant Anuradha Dutt Name Naresh Chandra Tarun Jain Exhibit 6: Auditors Name Chandra Wadhwa & Co Deloitte Haskins & Sells LLP R J Goel & Co Ramnath Iyer & Co Source: Capitaline Type Cost Auditor Statutory Cost Auditor Cost Auditor Source: Capitaline *Independent Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY FY Source: Bloomberg 28 January

11 N O T E S 28 January

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